This report has been prepared by the Audit Committees of Reed Elsevier PLC and Reed Elsevier NV in conjunction with the Audit Committee of Reed Elsevier Group plc (the Committees) and has been approved by the respective boards.
The report meets the requirements of the UK Corporate Governance Code, issued by the UK Financial Reporting Council, and the Dutch Corporate Governance Code, issued by Dutch Corporate Governance Code Monitoring Committee.
Audit Committees
The main role and responsibilities of the Committees in relation to the respective companies are set out in written terms of reference and include:
(i) to monitor the integrity of the financial statements of the company, and any formal announcements relating to the company’s financial performance, reviewing significant financial reporting judgements contained in them;
(ii) to review the company’s internal financial controls and the company’s internal control and risk management systems;
(iii) to monitor and review the effectiveness of the company’s internal audit function;
(iv) to make recommendations to the board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment, reappointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor;
(v) to review and monitor the external auditors’ independence and objectivity and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements; and
(vi) to develop and recommend policy on the engagement of the external auditor to supply non audit services, taking into account relevant ethical guidance regarding the provision of non audit services by the external audit firm, and to monitor compliance.
The Committees report to the respective boards on their activities identifying any matters in respect of which they consider that action or improvement is needed and making recommendations as to the steps to be taken.
The Reed Elsevier Group plc Audit Committee fulfils this role in respect of the publishing and information operating business. The functions of an audit committee in respect of the financing activities are carried out by the Supervisory Board of Elsevier Reed Finance BV. The Reed Elsevier PLC and Reed Elsevier NV Audit Committees fulfil their roles from the perspective of the parent companies and both Committees have access to the reports to and the work of the Reed Elsevier Group plc Audit Committee and the Elsevier Reed Finance BV Supervisory Board in this respect.
The Committees have explicit authority to investigate any matters within their terms of reference and have access to all resources and information that they may require for this purpose. The Committees are entitled to obtain legal and other independent professional advice and have the authority to approve all fees payable to such advisers.
The terms of reference of each Audit Committee are reviewed annually and a copy of each is published on the Reed Elsevier website, www.reedelsevier.com.
Committee membership
The Committees each comprise at least three independent non-executive directors. The members of each of the Committees that served during the year are: Ben van der Veer (Chairman of the Committees from August 2010), Lord Sharman (Chairman of the Committees until August 2010), Lisa Hook and David Reid. Lord Sharman and David Reid, both UK chartered accountants, and Ben van der Veer, a registered accountant in the Netherlands, are considered to have significant, recent and relevant financial experience. Lord Sharman will retire as a member of the Committees in April 2011. Read biographies of the members of each of the Committees.
Appointments to the Committees are made on the recommendation of the Nominations Committee and are for periods of up to three years, extendable by no more than two additional three-year periods, so long as the member continues to be independent. Details of the remuneration policy in respect of members of the Committees and the remuneration paid to members for the year ended 31 December 2010 are set out in the Directors’ Remuneration
Report.
Committee activities
The Committees hold meetings five times a year: in January, February, June, July and December, and reports on these meetings are made to the respective boards at the next board meetings. The principal business of these meetings typically includes:
- January: review of critical accounting policies and practices, and significant financial reporting issues and judgements arising in connection with the annual financial statements, including appropriateness of the going concern assumption; review of risk management activities, compliance and internal control effectiveness; reviewing and approving the internal audit plan; review of internal audit findings; review of the Reed Elsevier policy on auditor independence and the fees paid to the external auditor for audit and non audit services;
- February: review and recommending for approval to the Boards of annual financial statements, results announcement, annual report on Form 20-F and related formal statements; review of external audit findings;
- June: monitoring and assessing the qualification, performance, expertise, resources, objectivity and independence of the external auditors and the effectiveness of the external audit process; agreeing the external audit plan; reviewing significant financial reporting issues and judgements arising in connection with the interim financial statements; review of significant external financial reporting and regulatory developments; review of tax policies: review of compliance activities; review of report from external auditors on control matters; review of internal audit findings;
- July: review of critical accounting policies and practices, and significant financial reporting issues and judgements arising in connection with the interim financial statements, including appropriateness of the going concern assumption; review and recommending for approval to the Boards of the interim financial statements, results announcement and related formal statements; review of external audit findings; review of risk management activities and internal audit findings; review and approval of the external audit engagement letters; review of estimated external audit fees;
- December: review of year end financial reporting and accounting issues; review of significant external financial reporting and regulatory developments; review of external audit findings to date; review of internal audit findings; review of the terms of reference and effectiveness of internal audit; review of the terms of reference of the Audit Committees.
The Audit Committee meetings are typically attended by the Chief Financial Officer, the Reed Elsevier Group plc group financial controller, chief risk officer and director of internal audit, and audit partners of the external auditors. From time to time the Chairman and Chief Executive Officer may attend the Audit Committee meetings. Additionally, the managing director and senior representatives of the external auditors of Elsevier Reed Finance BV attend the July and February meetings of the parent company Audit Committees. At least one meeting each year, the Committees meet separately with the external auditors without management present. The Chairman of the Audit Committees has at least one separate meeting each year with the director of internal audit.
In discharging their principal responsibilities in respect of the 2010 financial year, the Committees have:
(i) received and discussed reports from the Reed Elsevier Group plc group financial controller that set out areas of significance in the preparation of the financial statements, including: review of the carrying values of goodwill and intangible assets for possible impairment, review of estimated useful lives of intangible assets, accounting for pensions and related assumptions, accounting for share based remuneration and related assumptions, review of the carrying value of investments, accounting treatment for acquisitions and disposals and business restructuring, application of revenue recognition and cost capitalisation policies, accounting for derivatives, review of tax reserves and provisions for lease obligations, and the use of the going concern basis in the preparation of the financial statements. Areas of focus in 2010 were the accounting and judgements in respect of: the carrying value of goodwill and intangible assets, taking into account the effects of the recent global recession and subsequent economic environment on business performance; revenue recognition and cost capitalisation as business models evolve from print publications to online services; accounting for the sale and/or closure of a number of Reed Business Information titles and businesses; tax provisioning; and the recognition of liabilities arising from the restructuring programmes and lease obligations.
(ii) reviewed the critical accounting policies and compliance with applicable accounting standards and other disclosure requirements and received regular update reports on accounting and regulatory developments.
(iii) received and discussed regular reports on the management of material risks and reviewed the effectiveness of the systems of internal control. As part of this review, detailed internal control evaluation and certification is obtained from management across the operating businesses, reviewed by internal audit and discussed with the Committees.
(iv) received and discussed regular reports from the Reed Elsevier Group plc chief risk officer and director of internal audit summarising the status of the Reed Elsevier risk management activities and the findings from internal audit reviews and the actions agreed with management. Areas of focus in 2010 included: project management of development spend, particularly in relation to the significant product and infrastructure investment in the US legal business; restructuring and acquisition integration activities, notably in the restructuring of Reed Business Information and the integration of the ChoicePoint acquisition within LexisNexis Risk Solutions; regulatory compliance and review of information security; business continuity planning; and continued compliance with the requirements of Section 404 of the US Sarbanes-Oxley Act relating to the documentation and testing of internal controls over financial reporting.
(v) reviewed and approved the internal audit plan for 2010 and monitored execution, including progress in respect of recommendations made. Reviewed the resources, budget and effectiveness of the internal audit function.
(vi) received presentations from the Reed Elsevier vice president compliance on the compliance programme, including the operation of Reed Elsevier’s codes of conduct, training programmes and whistleblowing arrangements; and from the LexisNexis senior vice president, privacy, security and compliance on management of data privacy, security and compliance.
(vii) received regular updates from the Chief Financial Officer on developments within the finance function.
Ben van der Veer, Lisa Hook and David Reid attended all five meetings of the Committees in 2010. Lord Sharman attended four meetings.
The external auditors have attended all meetings of the Committees. They have provided written reports at the February, June, July and December meetings summarising the most significant findings from their audit work. These reports have been discussed by the Committees and actions agreed where necessary.
External auditor independence and audit effectiveness
The Audit Committees have the delegated responsibility for reviewing the effectiveness of the external audit and overseeing the independence and objectivity of the auditors. Reed Elsevier has a well established policy on audit effectiveness and independence of auditors that sets out inter alia: the responsibilities of the Audit Committee in the selection of auditors to be proposed for appointment or reappointment at the annual general meeting and for agreement on the terms of their engagement and the scope of the annual audit; the auditor independence requirements and the policy on the provision of non audit services; the rotation of audit partners and staff; and the conduct of meetings between the auditors and the Audit Committee. The policy is available on the Reed Elsevier website, www.reedelsevier.com.
Under the policy, the auditors are precluded from engaging in non audit services that would compromise their independence or violate any professional requirements or regulations affecting their appointment as auditors. In general, the auditors may not provide a service which creates a mutuality of interest; places the auditor in a position to audit their own work; results in the auditor acting in a capacity akin to that of a company manager or employee; or puts the auditor in the role of advocate for the company. The policy sets out specific services that may not be provided by the auditors. The auditors may provide non audit services which do not conflict with their independence where their skills and experience make them a logical supplier of the services, and subject to pre-approval by the Audit Committee. The Committees have reviewed and agreed the non audit services provided in 2010 by the external auditors, together with the associated fees which are set out in note 3 to the combined financial statements. The non audit services provided were in the areas of taxation, other audit related services, due diligence and other transaction related services where their knowledge of the Reed Elsevier businesses and experience made them most suitable to carry out the work required.
The external auditors are required to rotate the audit partners responsible for the audit engagement every five years. The lead engagement partner has now completed his second year of auditing Reed Elsevier’s financial statements. Any decision to open the audit to tender is taken only on the recommendation of the Committees. The external auditors have confirmed their independence and compliance with the Reed Elsevier policy on auditor independence.
The Committees conducted a formal review during 2010 of the performance of the external auditors and the effectiveness of the external audit process for the year ended 31 December 2009. As part of this process, the Committees reviewed the report on the external auditors by the Audit Inspection Unit of the UK Financial Reporting Council issued in September 2010 and the report of the Autoriteit Financiële Markten in the Netherlands issued on 1 September 2010 on the general findings of the quality and effectiveness of audits performed by external audit firms (Rapport algemene bevindingen kwaliteit accountantscontrole en kwaliteitsbewaking). Based on these reviews, and on their subsequent observations on the planning and execution of the external audit for the year ended 31 December 2010, the Committees have recommended to the respective boards that resolutions for the reappointment of the external auditors be proposed at the forthcoming Annual General Meetings. Deloitte LLP and Deloitte Accountants BV or their predecessor Deloitte firms were first appointed respectively auditors of Reed Elsevier PLC and Reed Elsevier NV for the financial year ended 31 December 1994. In addition to the annual review of the performance of the external auditors and the effectiveness of the audit process, at least every four years the Committees will consider whether the objectives of the audit would be better served through a formal tender process for the auditor appointment.
The effectiveness of the operation of the Audit Committees was reviewed as part of the effectiveness review of the Boards in December 2010.
Ben van der Veer
Chairman of the Audit Committees
16 February 2011